Don’t Lose Sight of the Basics

A new poll finds financial executives are losing sleep over an old concern: financial controls.

Think financial executives are most worried about cyber-security risks or the mounting new regulations they must navigate? Think again.

While those are certainly big concerns, financial executives are, from a compliance and audit perspective, most worried about something much more mundane: internal controls over financial reporting. It’s the blocking and tackling of the internal audit domain, and audit shops that lose focus on the basics will find their forays into other areas of the business are counterproductive.

Internal audit can be a great resource to provide assurance and risk assessment in IT, operations, the supply chain, and other areas—indeed they must—but only after the financial reporting house is order. That’s because many financial executives still rank financial controls as the biggest compliance worry for the business. They are even losing sleep over them.

Nearly a third (31 percent) of respondents to a new KPMG poll of financial executives said internal controls over financial reporting (ICFR) was the compliance issue that most “keeps them up at night.” They said it was a bigger worry than their financial reporting responsibilities, tax compliance, new regulation, and even data security. The poll serves as a good reminder for internal auditors to avoid mission creep. In other words, don’t let new responsibilities cause you to lose focus on the core duties of assuring financial controls are in place and working effectively.

About 26 percent of respondents said they were most worried about data infiltration and IT security, which was at the bottom of last year's list,

Some 20 percent of executives worried most about tax compliance, and,

The specter of future regulatory mandates, which had topped the 2014 list of compliance concerns expressed by executives at last year's Symposium, troubled 17 percent of respondents the most.

"Clearly, the existing regulatory focus on internal controls over financial reporting and the here-and-now have overshadowed last year's fear of any unknown future regulatory changes that may or may not occur, while continuing headlines of data breaches have raised concerns across the C-suite," says John Ebner, National Managing Partner – Audit, for KPMG. "The poll results demonstrate the significant and broad responsibilities that fall to the CFO's unit in developing the company's financial performance and other financial communication reports."

Meanwhile, less than 29 percent of corporate financial preparers say their companies have a clear plan to implement the new revenue recognition standard, with less than 13 percent of the respondents saying they have completed an assessment of the effects of the new standard and are planning implementation. As many as 82 percent, however, say they are still assessing its effect (55 percent) or have taken no action (27 percent) while they await the completion of the standard setting.

Regarding the new leasing standard expected in early 2016, less than 13 percent say they have a clear plan for implementation, and only 9 percent of the respondents said they would implement this standard in 2016 or 2017. As many as 67 percent of those polled said they expected implementation in 2018 (18 percent) or 2019 (49 percent).

"Both standards will require significant effort, and these results demonstrate the complexity of implementation across entire organizations," says Ebner.

The poll also found that accounting standards could prompt changes in business models as companies may alter their own vs. lease or alter how they execute contracts with customers in response to the leasing and revenue standards, respectively. In addition, 22 percent of those polled said that they would or might consider providing International Financial Reporting Standards-based supplementary information if the SEC were to grant domestic registrants permission to do so.

Joseph McCafferty

@McCaffertyMISTI

Joseph is the former executive editor of Compliance Week, where he was responsible for all editorial functions.

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